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Adam Smith Inst - No case for renationalising utility sector, new paper finds

Based on the outcomes of utility privatisation for the government, shareholders and customers since the 1980’s, there is no case for renationalising the utility sector, a new paper from the Adam Smith Institute has found.

The paper, “Utility Gains: Assessing the Record of Britain’s Privatized Utilities” assesses the various utility sales of telecoms, gas, water and electricity companies during the 1980’s and 1990’s and looks at how government, shareholders and customers fared since the privatisation process. The paper argues that the following benefits occurred for each stakeholder:

For the government – various general benefits accrued, such as a pronounced surge in investment. It benefited financially, both from one-off sales proceeds and from ongoing sizeable Corporation Tax receipts.

For shareholders, like pension funds, have generally done very well, with many privatizations – particularly the 12 RECs – heavily outperforming the FTSE 100. Privatized water stocks, too, have powered ahead. There are a few notable exceptions to this, such as Railtrack, British Energy and British Telecom.

For utility customers the financial benefits have been less tangible – in a period of massively rising wholesale prices there has been little to pass on. But investment has been much higher and much-needed improvements in customer service have been developed. Telecoms prices have actually fallen materially, while domestic gas, water and electricity prices have all risen sharply in real terms. However, domestic energy prices have risen mainly due to much higher wholesale gas costs – not because of private sector ownership.

The paper finds investment in utilities is now much higher than before privatization, especially in the electricity distribution and water sectors. In the latter case, substantial real price increases have helped finance this investment which had been woefully inadequate prior to privatization in 1989. Over the 25-year period, roughly £110 billion has been invested in the water sector, with the overwhelming majority of this sum being spent by the ten privatized water companies. Currently, over £4 billion per year is being invested.

The paper argues that the privatisation of utilities also created an innovation spike, specifically in the telecoms sector. Privatising British Telecom in 1984, it argues, created a new industry as the staid former Post Office subsidiary started to participate in an international marketplace, in which mobile telephony was developing at a rapid pace. Within a few years, Vodafone had become the pioneer of mobile telephony to such an extent that, by 1999, it had become the fourth most valuable company in history within just two decades of its founding. Had British Telecom remained state-owned, it is probable that the broadband rollout would have been delayed even further.

Author of the report and Senior Fellow of the Adam Smith Institute, Nigel Hawkins, said:

In the light of recent criticisms of privatisation – including Jeremy Corbyn’s call to renationalise utilities and transport – this paper aimed to assess how the three major stakeholders actually fared in the sweeping privatisation of utilities throughout the 1980’s and 1990’s.

It is clear that while utility privatization is not a perfect solution, it is infinitely better than stultifying public sector ownership. It is inconceivable that the massive level of utility investment over the last quarter century could have been undertaken if public ownership had continued.

Director of the Adam Smith Institute, Dr Eamonn Butler, added:

Some of us remember what public services were like before privatization – the three-month wait to get a phone line, the curled-up British Rail sandwiches, and the annual power cuts from an Electricity Board that couldn’t cope. We do not want to go back to the dismal lack of customer service of nationalized services.

It is true that some utility prices have risen – though at least you can shop around for the best deal these days. But prices had to rise to fund the investment in networks that frankly, under nationalization, had been allowed to decay and crumble for forty years.

The old nationalized water industry aimed to be able to resist a once-in-a-decade drought. Soon after privatization, we had a once-in-a-century drought, and made clear to the companies that even that was unacceptable. Our water industry has raised its reliability ten times, and its quality by even more – but people quickly forget what things used to be like.

Notes to Editors:
Nigel Hawkins is a Senior Fellow at the Adam Smith Institute and an investment analyst, who specializes primarily in the electricity, gas, water and telecoms sectors. He has worked in the City since 1988, notably for Hoare Govett (now RBS), Yamaichi and Williams de Broe (now Evolution). Prior to joining the City, he worked for six years in politics, including three years as Political Correspondence Secretary to Lady Thatcher at 10 Downing Street.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: | 07584 778207.

The Adam Smith Institute is a free market, libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.
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